A COVID-19 Marshall Plan for Europe

The sheer scale of the economic fallout from COVID-19 justifies extraordinary measures, and nowhere more so than in Europe. Rather than questioning one another's motives, EU member states urgently need to unite behind a joint plan to avert economic disaster.

LONDON – Eurozone finance ministers finally agreed on April 9 to a package of measures to respond to the COVID-19 crisis. But in the face of an unprecedented medical and economic emergency, they need to be much bolder.

The lockdowns imposed in most European countries are economically devastating. Because many businesses are shuttered and almost everyone is confined to their homes, consumer spending has collapsed and economic activity has plummeted. Bankruptcy looms for many companies, unemployment is skyrocketing, and household incomes are cratering.

According to one official estimate, France’s economy is now operating at around two-thirds capacity. Assuming that similar contractions apply throughout the European Union, a three-month lockdown would cause annual output to fall by around 8% – a far bigger shock than in the 2008-09 crisis. Tourism-reliant Spain may be hit even harder.

Moreover, the losses may turn out to be much larger, because economies are unlikely to bounce back as quickly as they have fallen. Crippling uncertainty will remain. Indebted and fearful consumers may not resume their previous levels of spending even if they have jobs. Banks may prove unwilling or unable to lend, and many ailing businesses will never recover. Nor can anyone rule out further lockdowns in the months ahead.

European governments have therefore rightly stepped in to support cash-strapped businesses and income-deprived workers. But most of the eurozone has not responded as forcefully as Japan, the United Kingdom, and the United States have. In France and Spain, the fiscal boost is only around 2% of national income, and it is even lower in Italy. These are grossly inadequate responses to what could become a massive depression.

Why aren’t eurozone governments doing enough? The problem is not eurozone fiscal rules or EU state-aid rules, which have been suspended or relaxed. Nor is market access an issue, considering that governments’ borrowing costs are near-zero or negative. The problem, rather, is the abiding fear that soaring debts will lead to crushing EU-imposed austerity once the pandemic passes, and that governments’ higher refinancing needs could spark another financial crisis.

Subscribe to Project Syndicate

Enjoy unlimited access to the ideas and opinions of the world's leading thinkers, including weekly long reads, book reviews, and interviews; The Year Ahead annual print magazine; the complete PS archive; and more – all for less than $2 a week.

Subscribe Now

For now, the European Central Bank has pacified markets by committing to purchase at least €750 billion ($820 billion) of government and corporate bonds this year through its flexible new Pandemic Emergency Purchase Program (PEPP), in addition to its previously announced €360 billion worth of quantitative easing.

But the eurozone remains an unstable edifice, and its penchant for austerity is merely in abeyance. It survived the 2010-12 panic because markets believed then-president of the ECB Mario Draghi’s commitment that the ECB would do “whatever it takes” to hold the monetary union together, and governments then eased off on austerity. But Draghi’s successor, Christine Lagarde, has since undermined his commitment by declaring that “we are not here to close spreads” (referring to the additional interest paid by riskier borrowers, such as Italy, compared to safer ones, such as Germany). There is a real risk of financial crisis once the PEPP ends.

Perhaps the biggest problem, though, is political. The pandemic ought to have brought Europeans together in the face of a common threat that does not respect national borders. Instead, individual countries have largely fended for themselves. When Italy issued an urgent plea for medical help in late February, not one of the EU’s 26 other member states responded until China did. France and Germany actually banned the export of medical equipment, making a mockery of the EU’s single market. Likewise, Italy’s neighbors in the supposedly passport-free Schengen Area rushed to close their borders.

Worse, the COVID-19 crisis has revived the divisions and prejudices of the 2010-12 crisis. At a time when many Italians and Spaniards are dying, some northern Europeans – notably the Netherlands’ tone-deaf finance minister, Wopke Hoekstra – have implied that southern Europeans owe their plight to their own fecklessness.

It is little wonder that the crisis is bolstering anti-EU sentiment and populist nationalist parties, notably in Italy. Even Sergio Mattarella, the country’s pro-EU president, has despaired at the lack of solidarity. Meanwhile, the Brothers of Italy, who are even more extreme than the far-right League party, have been surging in the polls. A new hardline nationalist government could decide to issue tradable IOUs to ease both its fiscal constraints and Italy’s exit from the euro. That is the last thing the eurozone needs.

To avert a broader economic disaster, dispel the threat of a financial crisis, and provide much-needed political solidarity, Europeans should immediately launch a “COVID-19 Marshall Plan.” To match the scale of the crisis, the eurozone should commit to mobilizing at least €1 trillion (8% of GDP), which should be offered as grants – not loans that would add to national debt burdens – to suitable recipients across the monetary union. This could pay for medical needs such as testing, support hard-hit Europeans, and help seed the eventual economic recovery.

The plan should be funded by issuing common debt that the ECB would buy and hold for the foreseeable future. Unlike the temporary “coronabonds” that Germany, the Netherlands, and others have rejected, this new Marshall Plan would not cost European taxpayers, northern or southern, anything. And it should come with a sunset clause, to reassure those who fear that a permanent fiscal union will be created through the back door.

The measures agreed so far by eurozone finance ministers fall far short of that. Loan guarantees for smaller businesses are helpful. But EU loans to help fund medical expenses and employment-protection schemes actually would compound Italy’s problem, which is not market access but fiscal headroom. The decision to base a future Recovery Fund on “innovative financial instruments” is a meaningless fudge, and governments remain deadlocked over the issuance of collective debt. Europeans can only hope that their leaders conclude, sooner rather than later, that an ECB-funded Marshall Plan is the way forward.

Support High-Quality Commentary

For more than 25 years, Project Syndicate has been guided by a simple credo: All people deserve access to a broad range of views by the world's foremost leaders and thinkers on the issues, events, and forces shaping their lives. At a time of unprecedented uncertainty, that mission is more important than ever – and we remain committed to fulfilling it.

But there is no doubt that we, like so many other media organizations nowadays, are under growing strain. If you are in a position to support us, please subscribe now.

As a subscriber, you will enjoy unlimited access to our On Point suite of long reads and book reviews, Say More contributor interviews, The Year Ahead magazine, the full PS archive, and much more. You will also directly support our mission of delivering the highest-quality commentary on the world's most pressing issues to as wide an audience as possible.

By helping us to build a truly open world of ideas, every PS subscriber makes a real difference. Thank you.

The Europhiles embrace every crisis to conclude that the best solution is more EU, and above all more centralization of power in the hands of the Brussels pseudo-democracy.

The COVID-19 undoubtedly requires a broad approach in addressing the problems it has created. Brussels could help by investing in research and in some coordination.But the doctors, nurses and hospitals are in the field and they need support there asap. So do the business and the unemployed. These challenges have to be met by the National Governments, with some support from Brussels.

In the past week the Italian PM Conte called for help. He thereby merged 'emergency aid' with aid for the Italian 'econonomy', in a brutal and offence way. However these are completely different issues, and require completely different solutions.The Netherlands has no trouble offering emergency aid in regard to the virus, but it objected to solving the structural Italian economic issues under the flag of the virus.

These Italian economic issues are an Euro issue. The Euro is too expensive for the Italians to compete on the world market. If they would receive economic aid from Germany or the Netherlands they would loose the incencitive to strengthen their economy. The situation would only become worse. This is what brought the USSR and other communist countries to their knees. The Euro has been introduced into economies which were and are too dissimilar.There is no other solution than converting to several EU currencies in the Eurozone.This does not fit in with the dogmatic and obsessive dreams, and their lust for power, of the Europhiles.They prefer to go down with the EU ship, just like the USSR and many other communist states.

It is very political indeed. The Bundesbank holds a € 1000 billion Target-2-receivable balance, 80% of it from Italian and Spanish non-payment of exports. The local buyer paid and the seller received the money - this is the micro-level. On the Eurosystem-level no payment was ever made. It is about time that Italy and Spain start squeezing their own citizens before they go out and demand more " loans " they can never repay.

Philippe Legrain is calling for a EU-funded COVID-19 Marshall Plan, which, unlike the “Corona bonds” – loans that would add to national debt burdens – should be offered as “grants to suitable recipients” within the Eurozone, which should commit to mobilising “at least €1 trillion (8% of GDP)”. This amount “could pay for medical needs such as testing, support hard-hit Europeans, and help seed the eventual economic recovery.” According to the author this plan should be “funded by issuing common debt that the ECB would buy and hold for the foreseeable future.” The question is whether the action the European Central aims to take will be enough. The ECB has come up with an impressive €750bn bond-buying programme. The biggest share of the money would go to the neediest countries, to subsidise spending on health, corporate grants, unemployment pay and investment etc. It remains to be seen whether this programme would effectively avert a self-perpetuating downward spiral while the economies within the Eurozone are already heading toward recession. In the face of failing companies, illiquid banks, and struggling households, national governments could be entering dangerous territory, and the ECB would have no choice but to step in. The more their debt increases, the greater the risk that bondholders will panic, as was the case during the 2010-2012 sovereign debt crisis.The author says that his “new Marshall Plan” is quite different from the temporary “coronabonds” that Germany, the Netherlands, and others have rejected. This plan would not “cost European taxpayers, northern or southern, anything. And it should come with a sunset clause, to reassure those who fear that a permanent fiscal union will be created through the back door.” Apparently the EU would need to take on a role in fiscal policy, if France, Spain and Italy wanted the EU to issue bonds guaranteed by the member states.A new Marshall Plan to rebuild the post-pandemic Europe could help its economy bounce back, dealing a blow to the populists, who capitalise on the health crisis to win popular support and seize power. They say countries like Germany, Austria, the Netherlands etc have no appetite to dig deeper into their pockets to help out poorer Italy and Spain, and share out the coronavirus-incurred debt in the form of coronabonds. Unfortunately the EU does not command the resources or loyalties that can be called on by nation states.The author says “the Brothers of Italy, who are even more extreme than the far-right League party, have been surging in the polls,” due to anti-EU sentiments. “When Italy issued an urgent plea for medical help in late February, not one of the EU’s 26 other member states responded until China did. France and Germany actually banned the export of medical equipment….Likewise, Italy’s neighbors in the supposedly passport-free Schengen Area rushed to close their borders.”Italians feel that after the Eurozone and migration crises the EU has once again abandoned them. Their economy has scarcely grown since adopting the Euro and public debt is 135% of GDP. The populist Matteo Salvini now questions EU membership and may well-placed win the next election. “A new hardline nationalist government could decide to issue tradable IOUs to ease both its fiscal constraints and Italy’s exit from the euro. That is the last thing the eurozone needs,” the author says. The problem is that national governments still hold most of the key levers on health, borders and the economy. “Loan guarantees for smaller businesses are helpful. But EU loans to help fund medical expenses and employment-protection schemes actually would compound Italy’s problem, which is not market access but fiscal headroom.” It remains to be seen whether COVID-19 could be the final straw for the EU. The survival of the European Union is at stake as the continent weathers its worst crisis since World Wr II. Voices calling for a Marshall plan to rebuild the continent’s economies, are loud. No doubt massive public investments are necessary, and risk-sharing to address the financial burden is essential. Yet a middle ground needs to be found, so that aid recipients get their act together seriously. In the longer term they need a credible recovery plan, to put their economy back on track and achieve sustainable growth.

Mr. Legrain says that "Perhaps the biggest problem, though, is political". Not 'perhaps'. It is only political, having nothing to do with physically reconstructing a ruined Europe after world war II. It is only political, but much wider than the Italian medical life-saving plight: given that tens of millions of people are told to stay at home without knowing for how long, it is about sharing the burden of the steep and unavoidable drop in living standards (solidarity?) - within, and between, the member states.

But nevertheless, Mr. Legrain says that "this new Marshall Plan would not cost European taxpayers, northern or southern, anything". If so, there is, indeed, no reason why north European leaders should not embrace it asap, but, alas, no monetary sophistry (except, perhaps, for the MMT) can solve for the EU leaders the problem of sharing the Covid-19 living-standards shocks, that is, if the Union still means anything at all. Once the political matter is solved, i.e., that the better-off taxpayers help out the weaker ones, the monetary tools will easily present themselves, but you cannot "support hard-hit Europeans" and protect, for example, all creditors, just by printing money. As they say, "something's gotta give".

I see spending other people's money is still in vogue. And for all the authors proclamations about how it won't cost the taxpayers anything? That's has big a fantasy has the Game of Thrones. Eventually the Piper must be paid. Does anyone think it will be Italy or Spain or Greece paying this joint debts? It's just variant on let's spend SOMEONE ELSE'S money to pay our bills.

New Comment

It appears that you have not yet updated your first and last name. If you would like to update your name, please do so here.

Pin comment to this paragraph

After posting your comment, you’ll have a ten-minute window to make any edits. Please note that we moderate comments to ensure the conversation remains topically relevant. We appreciate well-informed comments and welcome your criticism and insight. Please be civil and avoid name-calling and ad hominem remarks.

Mass protests over racial injustice, the COVID-19 pandemic, and a sharp economic downturn have plunged the United States into its deepest crisis in decades. Will the public embrace radical, systemic reforms, or will the specter of civil disorder provoke a conservative backlash?

For democratic countries like the United States, the COVID-19 crisis has opened up four possible political and socioeconomic trajectories. But only one path forward leads to a destination that most people would want to reach.

Log in/Register

Please log in or register to continue. Registration is free and requires only your email address.

Emailrequired

PasswordrequiredRemember me?

Please enter your email address and click on the reset-password button. If your email exists in our system, we'll send you an email with a link to reset your password. Please note that the link will expire twenty-four hours after the email is sent. If you can't find this email, please check your spam folder.